THE FINANCIAL CRISIS OF THE IMF

The Creditor Threatens to Become a Debtor. Reforms are Unavoidable

By Michael R. Kratke

[This article published in: Freitag 39, 9/29/2006 is translated from the German on the World Wide Web,  http://www.freitag.de/2006/39/06390701.php ]


The International Monetary Fund has never fallen into such a deep crisis in its 60-year history. The meeting of its council of governors in Singapore was a crisis summit involving existence and non-existence, even if many participants tried to keep up the appearance of normality. A reform of the Fund root and branch was on the agenda. But the finance ministers of the 184 IMF member countries did not accomplish more than a symbolic first step.

The IMF could sink into irrelevance. This may hardly hurt anyone except for the 2,800 well-aid economists in its service. Growing mistrust and a swelling criticism of the supposedly “solid” policy of the Fund have led to a veritable crisis. The IMF is almost broke. The rich industrial countries of the North may not be greatly disturbed. They have long done without the IMF. Since the middle of the seventies, no state from this league has claimed a credit. No current member contributions are paid any more by the industrial states since the Fund should finance itself instead from the fees and interests of its borrowers. This functioned magnificently for a time until many big clients were annoyed by this way of awarding credits.

Originally the IMF within the Bretton Woods system of fixed rates of exchange helped member countries keep their currencies in the negotiated limits and bridged temporary balance of payments deficits. When the system collapsed in the spring of 1973, the IMF turned mainly to the South and – in direct competition to the World Bank – was the creditor for developing countries. Its policy changed essentially. At the end of the seventies, the IMF managers massively forced its debtors to make way for internationally mobile capital and radically reduce controls on capital transactions. While the volume of the credits granted by the IMF grew incessantly, the notoriously famous “conditions” were increasingly more severe for debtors. The powerful Fund members had insisted on a catalogue of mantras. Whoever sought help had to swallow this catechism indiscriminately.

ONE DOLLAR – ONE VOTE

The IMF forced its clients to the same policy of savings, lower wages, privatization and deregulation and was a debt collector that mercilessly punished any apostasy from the faith canon of liberal economic policy. The cup was full when the Fund wanted to relieve countries severely imperiled by the 1997 Asian crisis if they opened the door to foreign finance capital – above all to the hedge funds whose confused flight movements triggered the crisis. Everyone learned a bitter lesson.

With the exception of Turkey, all important threshold countries have paid back their debts to the IMF – as a rule, prematurely to become free of the Fund and its commissioners. Since 2003, for example, Thailand has been free of debt to the IMF. At the beginning of 2005, Argentina paid off all its credits two years before they were due. Moreover, the threshold countries on their own initiative have accumulated currency reserves of more than $2.5 trillion so they no longer depend on the IMF in financial crises. In Asia and Latin America, regional “monetary funds” have arisen like the “Chiang Mai initiative” from 2000 that unites China, Japan, Malaysia and South Korea.

The usual revenues from interests and fees are lacking to the Fund today so that a budget hole of over $110 million gapes in 2006 that promises to grow even larger. The IMF could obviously sell gold reserves and invest currency reserves in the capital market. However that would not be enough since it would become indebted. The shares of the members and their voting quotas must be recalibrated to escape a crash. The inner balance of power is up for disposition, redefining the amount of the “share.” How much credit every member country may claim and how much influence it can exert on IMF policy.

Measured by institutions like the World Trade Organization or the United Nations, the IMF is an extremely undemocratic system. Instead of “one country – one vote,” the good capitalist principle “one dollar – one vote” was in effect from the start. Whoever paid most had the most votes and the greatest influence. The richer lands dominate over the poorer. The greatest share of voting rights is distributed according to a “quota” calculated from the wealth and economic power of a country. In the course of time, the “quotas” altogether were re-evaluated twelve times. The voting rights could hardly be distributed more unequally.

Consequently only a few of the 184 IMF states have influence, first of all the US, the only country that has a blocking minority – a veto right – with a voting share of 17.1 percent. The G7 countries (US, Great Britain, France, Germany, Japan, Italy and Canada) have more than 44 percent of the votes; the 25 EU states have nearly 32 percent. Europe, the US, Canada and Japan together control over 63 percent of potential votes in the IMF. In contrast, the countries of the G77 – the group with 132 states of Asia, Africa and Latin America – have only 28 percent. This disharmony is carried too far when Latin America is put off with a quota of seven percent. Germany has a share of 6.1 percent. China’s share is very modest at 2.1 percent, India is at 2.1 percent and Brazil is at 1.5 per cent. These shares do not correspond to their rank in the world economy. These anachronistic relations are a crucial reason for the IMF’s legitimation crisis. The service of a creditor that meddles in an authoritarian way with hurried prescriptions in the affairs of sovereign states is not welcome.

“NEW” BRETTON WOODS

In October 2005 at a meeting in Chinese Xianahe, the most important threshold countries urged an overdue reform of the quotas and voting rights in the IMF and gained the assistance of the European Parliament that will be assigned only one seat in the future IMF administrative board to the seven countries of the Euro-zone – instead of the seven mandates in the past.

Whether this succeeds is more than doubtful. The plan of the executive director de Rato only contains a first concrete step: raising the quotas of the most strongly under-represented threshold countries China, South Korea, Mexico and Turkey. This was resolved in Singapore – with surprisingly many counter-votes because states like India, Egypt, Argentina, Brazil, Indonesia and Malaysia are not placated with minimal concessions.

The second reform stage involves calculating the quota of a member country. This raises the explosive question how the relative weight of a state in the world economy should be determined. Through the population number? Natural resources? Currency reserves and balance of payments? What weight should be given to which criteria? What seems like a conflict over political arithmetic is carried out as a world economic power struggle where threshold countries can only win when they find allies. The Swiss for example urge proper consideration for the relative weight of every country in the system of the international finance markets. Belgium, the Netherlands and Sweden hold a blocking minority in the Fund with Swiss citizens as a little refined financial power. This tear in the front of the rich is not hidden from the G77 countries.

The question where and how the IMF may be built in the world finance architecture is more serious. Why and for whom does the IMF exist? No one conclusively answered these questions in Singapore. Would it not be more rational to immediately take a “new Bretton Woods” course – to replace the present “non-system” with a real new order of the international monetary and finance system.

(*) The system of Bretton Woods arose in 1944 at a currency- and finance conference in the US in which 44 countries participated. A finance order of fixed rates of exchange with limited fluctuations was negotiated between the industrial states. The IMF and the World Bank were also founded in Bretton Woods.